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Started By
Message
Anyone familiar with ROBS
Posted on 1/26/23 at 12:12 pm
Posted on 1/26/23 at 12:12 pm
quote:
401(k) business financing, also known as Rollovers for Business Startups (ROBS), is a small business and franchise funding method. ROBS allows you to draw money from your retirement account in order to start or buy a business without incurring an early withdrawal fee or tax penalty.
I am currently exploring finance options to purchase a small business and came across this option. At first glance it seems to be a decent idea but appears there are some strict guidelines that must be followed to qualify.
Anyone here familiar with this option and/or have gone through the process? I would love to hear some personal experiences (good or bad).
2
Posted on 1/26/23 at 3:06 pm to Longtime_Lurker
quote:
At first glance it seems to be a decent idea
So is Communism.
But the details are horrible..,
Posted on 1/26/23 at 3:33 pm to Longtime_Lurker
But seriously...
You form an C Corporaton - this is important - the business must be inside a C Corporation. A state law statutory corporation... not an LLC taxed as a corporation.
C Corporation forms a 401K plan.
You rollover cash from another 401(k) plan into this new 401(k) plan.
Corporation authorizes stock. Using the money in your 401(k) plan, the 401(k) plan purchases the stock in the company and allocates it to your 401(k) account.
Now the C Corporation has cash and it starts up business.
The 401(k) plan is the owner of the business. You become the corporate officer.
There are companies that can set all of this up for you.
The two, big, honking huge caveats:
1) It's a C Corporation. Which means all the fun and games of C Corporation taxation. There's a reason why most small businesses are NOT C Corporations.
2) If the business fails... which most small businesses fail within 5 years... you've now blown your retirement money as well, as there will be no market to sell the stock to someone else.
You form an C Corporaton - this is important - the business must be inside a C Corporation. A state law statutory corporation... not an LLC taxed as a corporation.
C Corporation forms a 401K plan.
You rollover cash from another 401(k) plan into this new 401(k) plan.
Corporation authorizes stock. Using the money in your 401(k) plan, the 401(k) plan purchases the stock in the company and allocates it to your 401(k) account.
Now the C Corporation has cash and it starts up business.
The 401(k) plan is the owner of the business. You become the corporate officer.
There are companies that can set all of this up for you.
The two, big, honking huge caveats:
1) It's a C Corporation. Which means all the fun and games of C Corporation taxation. There's a reason why most small businesses are NOT C Corporations.
2) If the business fails... which most small businesses fail within 5 years... you've now blown your retirement money as well, as there will be no market to sell the stock to someone else.
This post was edited on 1/26/23 at 3:34 pm
Posted on 1/26/23 at 7:45 pm to LSUFanHouston
Thanks for the explanation!
I guess the key will be determining if the return rate of the business will be greater than the long term return on the money I withdraw. There are definitely a lot of factors that will need to consider!
I guess the key will be determining if the return rate of the business will be greater than the long term return on the money I withdraw. There are definitely a lot of factors that will need to consider!
Posted on 1/27/23 at 7:06 am to Longtime_Lurker
quote:
I guess the key will be determining if the return rate of the business will be greater than the long term return on the money I withdraw. There are definitely a lot of factors that will need to consider!
Yup.
For what it's worth... in every ROBS setup I've seen, it's never been someone starting their own business from scratch. It's always been either a franchise purchase, or the purchase of an existing business that involved a broker.
The franchise companies / brokers know that most people's liquid wealth is in their retirement accounts, and could not afford the cash requirements / could not qualify for a large enough loan to buy the business / buy the franchise. So they oush these as that increases the number of people who could buy the franchise / business.
Posted on 1/27/23 at 9:39 am to LSUFanHouston
quote:
. It's always been either a franchise purchase, or the purchase of an existing business
This is what I am looking to do.
One more question...I read something that made it sound as if the business (post purchase) would have to be my primary job. Does that sound right? I do not plan to quit working full time. Albeit, I likely will not work for my current employer for the remainder of my career, but I do plan to continue working for a few more years or at least until the business proves to be successful.
Posted on 1/27/23 at 9:58 am to LSUFanHouston
This is what's so great about the MT. There's no way any of that information would be had without scouring a convoluted government website. Appreciate you.
Posted on 1/27/23 at 10:27 am to Longtime_Lurker
quote:
One more question...I read something that made it sound as if the business (post purchase) would have to be my primary job. Does that sound right? I do not plan to quit working full time. Albeit, I likely will not work for my current employer for the remainder of my career, but I do plan to continue working for a few more years or at least until the business proves to be successful.
In order to participate in the 401(k) plan which is a critical factor here, you have to be a bonafide employee. Additionally, the business itself can't be passive, nor can your involvement be passive.
So to acheive all of this, the reccomendation is that you work at least 1,000 hours per year in the business.
That's not stopping you from keeping your other job, as long as you can work 1,000 per year in this business.
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